Category Archives: Development and Antitrust Law

The relationship between antitrust and equitable growth

By Francisco Beneke*

The title of this post describes, according to the Washington Center for Equitable Growth, an under-researched area of economic policy. Therefore, the Center is opening a conversation on the subject “through a series of essays, reports, and future events that lay the groundwork for debate and informed solutions”.

The latest publication is “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter“. I highly recommend that you check it out as well as the other publications that can be found under the series entitled “Making antitrust work in the 21st century“. Commentary on each publication to follow.

*Co-editor, Developing World Antitrust

Why We Need Antitrust Law to Work: Some Thoughts on South Africa and El Salvador

By Francisco Beneke*

South Africans appear to be enraged by the prospect of having had to pay a higher price for cancer drugs. The Competition Commission of South Africa is currently undertaking three separate investigations on excessive pricing by three drug manufacturers: Aspen, Pfizer, and Roche. In El Salvador, the final word from the Supreme Court is finally out on the proceedings regarding a cartel of two wheat flour producers who conspired to raise the price of this product. In these two countries, which have a relatively high poverty rate (as defined by local authorities), antitrust cases that involve access to health and nutrition have an extra component that makes them special. Indeed, cases like this have the potential of generating social unrest. Why? The image of a cancer patient who cannot afford a needed drug or a malnourished child evokes a feeling that other cases do not.

Before going any further, one distinction between the situations in the two countries has to be made. In South Africa, we are talking about three ongoing investigations where guilt has not been yet established, while in El Salvador, the case that concerns us has already been decided. The two flour producers were found guilty and rightfully so. The case is the only instance where the Salvadoran authority has conducted a dawn raid, in which it found conclusive evidence of the agreement to allocate market shares. The point of this article is not to advance a judgment in the case of the South African investigations but to point out why a correct competition law enforcement policy is crucial in developing countries. Cartels and abusive dominant firms can be extra harmful in the sense that poor consumers do not simply forgo a part of their welfare but the harm extends to their daily struggle to survive.

I have picked these two examples as the basis of this post because they are recent developments. However, we can find similar situations in other countries in the past. When the farmacies cartel was uncovered in Chile, the population was so enraged by having had to pay more for their medicines that protests erupted and all of this served as a catalyst for reforms that strengthened the Chilean competition authorities.

Developing countries have a particular need for a working competition policy. They do not only have to ensure markets that promote productivity growth but also protect consumers in vulnerable situations. As a consequence, it is important to ensure that the deterrence effects are maximized in markets strategic to this purpose. I say this because it is a common problem in developing countries that competition authorities are underfunded and understaffed. As a result, their investigation and case-resolution capabilities are limited, which decreases the expectation of companies of being caught and punished for competition law infringements. In such a situation, the authority can nevertheless create such an expectation in important industries––for example, health and food products––by focusing its scarce resources on this industries. The deterrence effect of antitrust will not work in the whole economy but at least in an essential part.

The case of El Salvador also shows an important area where the advocacy efforts of the authority should be directed: judicial efficiency. The wheat flour cartel case spent almost nine years under judicial review after the date of the Competition Superintendence’s decision. Such prolonged court battles significantly hamper the deterrence effects of the competition law since the final payment of the fine and, perhaps more importantly, the enforceability of the injunction is postponed. Therefore, the companies can significantly discount the potential losses of an adverse judgment (though they have to pay substantial litigation costs, which nevertheless shows the value they place on delaying the final judgment). In addition, the lengthy proceedings tie up important personnel of the antitrust authority, which affects its enforcement activities.

Competition policy in developing countries faces more difficulties than in developed economies. But more is at stake. It is important that the policies achieve maturity and gain sufficient importance in the eyes of the public so that their funding can become a priority and the authorities can have a better chance of achieving their purpose.

*Co-editor, Developing World Antitrust

 

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Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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Regional integration and antitrust policy: Bigger markets are harder to threat

By Francisco Beneke*

I was talking to a friend at the Max Planck Institute for Innovation and Competition with whom I share an office, and he pointed out to me a risk to which antitrust authorities in developing countries are exposed and a good way of protecting them from it. His point was simple but brilliant. Let me tell you briefly what our conversation was about.

Haris pointed out to me that in the course of the proceedings, a multinational could subtly (or not so subtly) make the threat that, should it be enjoined from a certain conduct and imposed a fine, it would find it necessary to cease operations in the country in question adducing any business justification, such as unprofitability. Let’s say a pharmaceutical company is being tried for impeding parallel imports in a country where this is perfectly legal. If it were enjoined from entering into contractual provisions that make these imports harder in order to sustain a higher price for its medicines, the company may say that it would be forced to leave the market. If operation with the lower price due to competing imports would still be profitable, this hardball tactic could still make sense if the size of the market is so small as to render any effects on global profits negligible. The purpose would be to send a message and actually carrying out the threat would signal that the company means business.

The practical implications could put the antitrust authority in an awkward situation. The central government may not be so happy with losing a source of tax revenue. Workers will certainly not like their sudden unemployment. To make things worse, consumers will lose some of their welfare because of the supply contraction. It is easy to see how the antitrust authority may have more at stake than the multinational corporation.

On the other hand, what if this country suddenly becomes a part of an economic union with a common competition policy? The firm will be enjoined from sustaining price differences that are based solely on its market power and not in different costs in each country (in practice that would translate to the ones it can prove to the authority). Now the threat of leaving would have to involve a bigger market, and if such new market is large enough to offset the benefits of sending a message then the company cannot make a credible commitment to cease operations. It is simply not in its best interest. In short, Haris’ argument was that integration of markets and competition policy protects smaller member countries of such threats.

I am aware that the example raises some other issues, such as the desirability of addressing price discrimination within antitrust proceedings, but the point applies to any kind of anticompetitive behavior too. Less controversially, we could imagine the same kind of threat involving a cartel. Integration is not easy, but there are good reasons to pursue it.

*Co-editor, Developing World Antitrust

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Development and Competition: a Useful Tool for Salvadoran Growth

By Flor A. Calvo*

Economic growth and development are highly relevant and important topics in El Salvador: education, health, transportation and security policies all focus on producing better social and economic levels in the country. However, competition law, a policy already present in El Salvador, has been constantly neglected as part of this toolkit for promoting growth and development. The law’s main objective is to “increase economic efficiency and consumer welfare”[1] by eliminating agreements among competitors, abuse of market power or mergers that could damage market competition and harm consumers.

But, how exactly could competition law affect development and growth?

Both theory and empirical research, like Nickell (1996)[2], Aghion (2008)[3] and Buccirossi (2013)[4], indicates that market competition increases productivity among markets and firms, due to the fact that firms that operate in highly competitive markets need to constantly innovate their products and improve their quality. Good examples of this dynamic are food courts: each competitor (food chains) presents their best possible offer in order to attract as many consumers as possible.

Another channel, through which competition affects development, is through the price level offered in each market. The greater the competition in a particular market, the lower the price level it has. Ivaldi (2014)[5] shows that prices in markets where cartels were found were 23% higher compared to the periods prior the establishment of the agreements. This implies that a timely and effective cartel detection ensures that consumers would not have to pay overpriced goods and services.

Also, Gutman & Voigt (2014)[6] analyzed the impact that newly enacted competition laws had on economic growth. They found once competition laws are enacted, they increase economic growth in countries that established them. For developing countries, in particular, economic growth is boosted through an increase in investment levels, both national and foreign investment, among countries with a competition law.

However, the effectiveness of the law to generate competition, and therefore growth, depends not only on its presence, but on the efficacy of its application. This requires coordination among competition authorities and other government institutions in order to punish anticompetitive actions and agents appropriately. Greco et al[7] showed that for Latin American countries, competition law is not enough to increase sustainable growth, but that they need a strong and effective enforcement of the law in order to generate the desired impact.

Although competition law has many limitations, it is a viable option to foster growth and development in El Salvador. Its relevance and inclusion into public policy discussions should be a priority since it is an option that generates positive externalities by increasing productivity, growth and local investment. Cases like South Africa, where competition is at the core of its policies, show how the introduction and strengthening of national competition enhances economic growth and social welfare. Certainly, our country possesses an important tool, one that could boost our economy if applied correctly.

*This article is a translation kindly provided by the author from a post in El Blog de la Competencia. The author holds a bachelor’s degree in economics and a master’s degree in international economics and development, specializing in impact assessment; has worked for international organizations such as FSD and 3ie; and works currently as an economist in the department in charge of the investigations of anticompetitive behavior in the Competition Superintendence of El Salvador.

[1] Art. 1, Competition Law. El Salvador.

[2] Nickell, S. (1996). Competition and Corporate Performance. Journal of Political Economy 104(4), 724-746.

[3] Aghion, P., Braum, M., & Fedderke, J. (2008). Competition and Productivity Growth in South Africa. Economics of Transition, 16(4), 741-768.

[4] Buccirossi, P., Ciari, L., Duso, T., Spagnolo, G., & Vitale, C. (2013). Competition Policy and Productivity Growth: An Empirical Assessment. Review of Economics and Statistics, 95(4), 1324-1336.

[5] Ivaldi, M., Khimich, A., & Jenny, F. (2014). Measuring the Economic Effects of Cartels in Developing Countries

[6] Gutmann, J., Voigt, S. (2014). Lending a Hand to the Invisible Hand? Assessing the Effects of Newly Enacted Competition Laws.

[7] Greco, E., Petrecolla, D., Romero, C., & Martinez, J. Competition Policy and Growth: Evidence from Latin America.

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What Does Being a Developing Country Mean and What Does that Have to Do with Antitrust?

By Francisco Beneke*

What Is a Developing Country?

“Developing” is quite a broad label because we group under it countries as different as Brazil and Botswana, Mexico and Afghanistan, Pakistan and El Salvador. What about Russia or China? It sounds odd to put the largest successor state of the Soviet Union or the second largest economy in the world in the same pool as the other countries mentioned before. The issue is obviously not simple and certainly not a settled one.

The World Bank has a classification according to income per capita, which gives a simple measure for differentiating countries. However, it does not fully capture development differences. Venezuela, for example, is classified as a high-income country, but no one would argue that the standard of living there is similar to that of, say, Chile, which has a comparable income level.

GDP per capita growth as a measure of rising living standards has been under attack for some time and with good reason. One of the main critiques is that the measure does not capture how unequal growth is (fundamental in knowing how the situation of the most vulnerable parts of the population improves). In the US for example, in spite of continuous economic growth, the inflation-adjusted wages at the bottom of the income distribution have decreased.

The International Monetary Fund has its own classification of countries. In the World Economic Outlook yearly publication, the countries are classified either as advanced, transition, and emerging and developing economies. The criteria are not expressly set out but some information has been revealed as some countries get reclassified into the advanced category. An advanced country has basically a combination of high income per capita, well-developed financial systems, and a strong diversified economy. These criteria were mentioned when Israel, South Korea, and Singapore were promoted to advanced countries. However, there are no published parameters that a country has to reach in these areas to be classified in either category. The IMF observers simply know an advanced country when they see one.

The World Economic Forum takes a whole different approach and ranks economies by their competitiveness. The term is defined in the Global Competitiveness Report as the set of institutions, policies and factors that determine the level of productivity of a country. From lowest to highest competitiveness, the country classifications are: factor-driven, efficiency-driven, and innovation-driven economies. Between the three stages, there are countries classified as being in a transition period. Argentina and Brazil, for example, are in a transition between being an efficiency-driven economy to an innovation-driven one.

Finally, a discussion of what is development (which entails the question of what a non-developed country is) has to take into account the approach pioneered by Amartya Sen. According to the author, the correct approach of development policies should be to promote individual freedoms necessary for people to expand their capabilities.[1] His approach has been labeled as more humanistic since it attempts to focus development efforts on the individual’s liberties and not on macroeconomic indicators that obscure the multifaceted aspects of what makes someone fulfill his or her aspirations.

What Does All of These Have to Do With Antitrust? 

The income level of the population, the factors that affect productivity, and the conditions under which individuals can fulfill their potential are directly connected with competition policy in many ways. Since all of the previously mentioned classifications entail insights that are useful to antitrust analysis, it does not come as a surprise that the literature on the latter is not committed to one specific classification but rather has taken a more pragmatic approach. That is, commentators usually identify characteristics that are associated with lower development instead of discussing whether countries like Russia, Malaysia or Turkey are developing economies.[2]

As a first point, in a country with a low income level and a significant portion of the population living in poverty, the issue of whether antitrust law enforcement contributes to development becomes central. In a previous post I already analyzed some of the issues that are present in the literature, but the main conclusion is that there is no undisputed evidence that law enforcement activities lead to economic growth. A satisfactory methodological approach and good measures of the quality of competition policy are yet to be found.

Another issue closely connected to the previous one and already analyzed by Amine has been the establishment of enforcement priorities based on development goals such as the reduction of poverty. An additional related point is the use of antitrust policy to further the growth of local small and medium enterprises, protecting them from exclusionary conduct from dominant multinational firms. This has been the approach taken by China, much to the displeasure of the US.

Another point is that developing countries have some characteristics in common that affect the analysis within the cases. One example is the size of the informal economy, which in developing countries tends to be larger. The informal economy can affect an authority’s assessment of market power of firms in the formal sector. Usually, a key issue is to determine if producers in the informal sector can be considered as part of the same relevant market of firms in the formal sector and, thus, dilute the market shares of the latter. Other characteristics associated with developing countries that have been mentioned in the literature as variables that affect market conditions are corruption, underdeveloped financial markets, and scarcity of skilled labor.[3]

Finally, developing countries usually share a weak institutional environment. This is a factor that can affect antitrust analysis, especially within regulated industries, but it can also affect the effectiveness of competition policy itself. The authorities can in this respect find problems in procuring adequate budgets and staffing. Another important obstacle could be a slow and inefficient judiciary, postponing the final word on a decision in a case for years. Another practical problem is the lack of market information from public institutions (a given in countries like the US), which seriously hinders the investigation efforts of the competition authority.

Some Final Remarks

The main take away from examining various classifications of countries based on measures of development is that none of them fully captures the multifaceted aspects of the problem. To inform policy, one has to take the valuable insights that each of the relevant criteria gives and not focus only on, for example, increasing GDP growth.

Antitrust law is one of the tools of economic policy and, therefore, has to be shaped according to the specific needs of each country. Adapting competition policy to developing economies does not mean in general coming up with two categories of laws depending on whether a country is developed or not. It means establishing legal standards and enforcement priorities that suit, for example, El Salvador but that may not be adequate for China.

 *Co-editor, Developing World Antitrust

@Paco_Beneke

[1] Amartya Sen, “Development as Freedom”. Oxford University Press, First Edition (2000).

[2] A good example of this can be found in “The Economic Characteristics of Developing Jurisdictions: Their Implications for Competition Law”, Michal S. Gal, et al, eds.

[3] Michal S. Gal and Eleanor M. Fox, “Drafting Competition Law for Developing Jurisdictions: Learning from Experience”. In The Economic Characteristics of Developing Jurisdictions: Their Implications for Competition Law. Michal S. Gal, et al Eds. Edward Elgar Publishing (2015)

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How Can Competition Law Enforcement in the Digital Economy Help in the Fight Against Poverty?

By Amine Mansour*

When talking about competition law and poverty alleviation, we may intuitively think about markets involving essential needs. The rise of new sectors may however prompt competition authorities to turn their attention away from these markets. One of those emerging sectors is the digital economy sector. This triggers the question of whether the latter should be a top priority in competition authorities’ agenda. The answer remains unclear and depends mainly on the potential value added to consumers in general and the poor in particular[1].

Should competition authorities in developing countries focus on digital markets?

Obviously, access to computer and technology is not a source of poverty stricto sensu. In the absence of basic needs, strategies focusing on digital sectors may prove meaningless. In practice, the last thing people living in extreme poverty will think about is gaining digital skills. Their immediate needs are embodied in markets offering goods and services which are basic necessities. The approach put forward by several Competition authorities in developing countries corroborates this view. For instance, in South Africa, digital markets are not seen as a top priority. Instead, the South African competition authority focuses on food and agro-processing, infrastructure and construction, banking and intermediate industrial products.

There are however compelling arguments to be made against such position. Most importantly, although access to technology and computers is not a source of poverty, such an access can be a solution to the poverty problem. In fact, closing the digital gap by providing digital skills and making access to technology and Internet easier can help the low income population when acting either as entrepreneurs or consumers. In both cases competition law can play a decisive role.

The low income population acting as consumers

First, when acting as consumers, people with low income can enjoy the benefits of new technology-based entrant. Thanks to lower costs of operation, lower barriers to entry and (almost) infinite buyers, these new operators have changed the competitive landscape by aggressively competing against traditional companies. These features have helped them not only extending existing products and services to low-income consumers but also making new ones available for them. Better yet, in some cases increased competition coming from technology-based companies motivates traditional business forms to adapt their offer to low-income consumers so as to face this new competition and remedy shrinking revenues. Perhaps, the most noteworthy aspect of all these evolutions, is that these new entrants have, in some instances, been able to challenge incumbents’ position by driving prices downward to levels unattainable by traditional companies without scarifying their profitability.

A shining example of all this dynamic is the possibility for low-income consumers to engage, thanks to some mobile companies, in financial transaction without the need to pass through the traditional stationary banking infrastructure. For instance, in Kenya, M-PESA a mobile money transfer service that has over 22 million subscribers[2] and around 40,000 agents (around 2600 Commercial bank branches)[3] changed the life of million of citizens. The service enables clients to deposit cash into their M-PESA accounts, send or transfer money to any other mobile phone user, withdraw cash and complete other financial transactions. A farmer in a remote area in Kenya can send or receive money by simply using his mobile phone. In this way, M-PESA can act as a substitute to personal bank accounts. This experience shows how the digital economy helps overcoming the prohibitive costs of reaching low-income customers and thus raising living standards.

On that basis, we can easily imagine the counter-argument incumbent companies might put forward. In this regard, unfair competition and the need for regulation to preserve policy objectives are often in the forefront. However, there is a great risk that these arguments are simply used to restrict market entry and impede competition from those new players.

In fact, this kind of arguments do not always reflect market reality. For example, in some remote geographic areas, traditional companies and the new ones based on the digital/internet space do not even compete directly against each other. Accordingly, regulation intended to protect policy goals has no role to play given that the affected consumers are out of the reach of the traditional business. In the M-PESA example, it may be possible to argue that any operator engaging in financial transactions should observe the regulatory restrictions that apply to the banking sector in order to ensure that policy objectives such as the stability of the banking system or the protection of consumer savings are preserved. However, applying such a reasoning will leave a large part of consumers with no alternative given the absence of a banking infrastructure in remote areas. The unfair competition and regulation arguments may only hold in cases where consumers are offered alternatives capable of providing an equivalent service.

This shows the need to proceed cautiously by favoring an evidence-based approach to the ex-post use of the regulation argument by incumbent operators. This is however only one of different facets of the interaction between the competitive impact of companies based on the internet-space, the regulatory framework and the repercussions for people with low income[4].

The low income population acting as entrepreneurs

Second, the focus on digital markets as way to alleviate poverty is further justified when low-income people act as entrepreneurs. In fact, digital markets are distinguished from basic good markets in that they may act as an empowering instrument that encourages entrepreneurship.

More precisely, the digitalization of the economy results in an improved access to market information which in turn may benefit entrepreneurs especially the poor whether they intervene in the same market or in a different one. Practice is replete with cases where, for instance, a downstream firm heavily relies for its production/operation on services or products offered by an upstream company operating in a digital market. Similarly, in a traditional and somewhat caricatural way, a small-scale farmer may use VOIP calls to obtain market information or directly contact buyers suppressing the need for a middleman.

However, we can well imagine the disastrous consequences for these small-scale farmers or the downstream firm if mobile operators decide to block access to internet telephony services such as Skype or WhatsApp based on cheap phone calls using VOIP (this is what actually happened in Morocco). In such a case, the digitalization of the economy has clearly contributed to greatly lowering the costs of communication and distribution. However, low income entrepreneurs are prevented from benefiting of these low costs, which are a key input to be able to compete in the market.

The major difficulty here lies in the fact that, when low income people act as entrepreneurs, it is likely that they organize their activities in small structures. This result in relationships and structures favorable to the emergence of exploitative abuses. Keeping digital markets clear from obstructing anticompetitive practices is thus indispensable to ensure that small existing or potential competitors are not prevented from competing. This might not be easily achieved given that competition authorities’ focus is sometimes more on high profile cases.

*Co-editor, Developing World Antitrust

[1] Intervention may also be justified by the institutional significance argument. This significance lies in the fact that those markets are growing ones and challenging the common ways of both doing business and applying competition rules which in turn make it crucial for authorities to intervene by drawing the lines that ensure the right conditions for those market to grow and develop.

[2] http://www.safaricom.co.ke/about-us/about-safaricom

[3] http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[4] For instance, it possible to think of the same problem from an ex-ante point of view highlighting incumbent firms’ efforts to block any re-examination of the regulatory standards that apply to the concerned sector (no relaxation of the quantitative and qualitative restrictions). This aspect has more to do with the advocacy function of competition authorities.

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The Fear of Market Concentration, the Legacy of the Chicago School of Antitrust, and Political Influence of Firms – Lessons for Developing Countries

By Francisco Beneke*

The Fall of the Structure-Conduct-Paradigm and the Rise of the Chicago School of Antitrust

In its first decades, the courts and enforcers in the US were skeptical of market concentration and took a wide view of which conducts from dominant firms could be considered unlawful under the antitrust laws. This was in part due to the influence of the structure-conduct-performance paradigm that was widely supported by industrial organization economists of the time.

That changed with the rise of the Chicago School of Antitrust. Some of their main ideas were that market concentration was not always a sign of diminished competition and that the unilateral exercise of market power is almost always self-correcting and does not warrant the costs of antitrust intervention. This thinking took a strong foothold in academia and the courts in the late 1970’s and during the first Reagan Administration. During this time, many key positions in the DOJ, FTC, and the federal bench were filled with Chicago School supporters. The result was a clear break with prevailing rules regarding merger control and unilateral conduct such as predatory pricing.

Since then, some of the considerations that courts made in the past when blocking mergers and punishing dominant firms are now dismissed as making no economic sense. In this post, I analyze one such specific consideration that relates to the desire of a decentralized market structure because of the danger market concentration poses to democracy.

Does Favoring an Economy of Many Producers instead of a few big Efficient Corporations Make No Economic Sense?

In the 1960’s, starting with Brown Shoe Co., the US Supreme Court issued a series of merger decisions blocking transactions that in their most part concerned companies with low market shares. One of the main arguments of the Court was that the intent of Congress in enacting certain amendments to the Clayton Act was to stop the worrisome rising tide of concentration in the American economy. In the words of the Supreme Court: “we cannot fail to recognize Congress’s desire to promote competition through the protection of viable, small, locally owned businesses”. Higher prices could result from curtailing consolidation but the Court interpreted that Congress had stroke a balance in favor of decentralization. Similar arguments were used in 1945 in the Alcoa decision by judge Learned Hand in interpreting section 2 of the Sherman Act.

The decisions mentioned that Congress was worried not only with the economic power of firms controlling large parts of commerce but also with the threat that such control could have on other values of their democratic society. Individuals could find themselves helpless before big corporations. These considerations are now largely dismissed as not grounded on sound economic analysis. Weren’t they though? Under the light of political economy theories it is a valid question to ask.

Some economists argue that market concentration is a predictor of the formation of interest groups, and that dominant firms are more likely to exert political influence independently from their industry peers. That is, a firm with monopoly power is more likely to lobby for its own interests rather than those of the market as a whole. In addition, there is literature that supports an association between campaign donations and policy outcomes favorable to the donating firms. In other words, interest groups are effective in shaping public policy. In an earlier post in this blog, Amine already analyzed how influential firms could shape the adoption and enforcement of antitrust laws.

These theories and empirical studies can provide a framework and foundation on which to analyze a worrisome trend toward concentration of firms in the economy and still fit the analysis under the consumer welfare paradigm. For example, a merger that will lead to a stronger oligopoly can make firms in the industry lobby more effectively in order to entrench their position, especially in regulated markets. The likely result could be lower consumer welfare even in the face of efficiencies associated with the transaction.

These political economy theories are old. Dismissing the concern of the courts in the past regarding concentrated markets and the threat to democracy as based on unsound economic analysis was more a product of not looking outside the boundaries of microeconomics rather than the considerations lacking any economic sense.

Should Developing Countries be Concerned about a Worrisome Trend toward (or a Reality of) Concentrated Markets?

Professor Eleanor Fox advocates for a different focus for competition policies in developing countries. Rather than pursuing consumer welfare, Professor Fox advocates for competition policy as a tool of empowering medium and small enterprises by protecting them from abuses of dominant firms. The theories that link concentrated markets with the formation of interest groups and sub-optimal policies can be another argument in favor of Professor Fox’s approach.

The possibility of entrenching a monopoly or oligopoly position with the help of government policy can also have a long lasting impact in the overall development of the country. Firms that have already made investments in a given technology can oppose the introduction of new ones until they recoup their investment. That in turn would slow the pace with which countries adopt the latest methods of production, affecting productivity and, therefore, the income of workers.

If there is a link between concentrated markets and all of these harms that are usually not considered in antitrust analysis, then developing countries should be concerned with a rising tide or a current predicament of concentrated markets.

Another issue would be to analyze whether competition policy could be an effective tool to achieve this end. Given the already extensive length of this post, that can remain as a topic for future discussion.

*Co-editor, Developing World Antitrust

@Paco_Beneke

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The Concentration of Economic and Political Power: A Priority for Competition Law and Policy in Developing Countries?

By Amine Mansour*

In the literature dealing with competition law and policy in developing countries, there appears to be a consensus according to which competition law cannot contribute to development unless it wins its battle against what is called the concentration of economic and political power.

Before getting into more details, the idea of concentration of economic and political power deserves some words. The concept in itself is not clear. The idea can be understood either as the collusion between the economic and the political powers leading to a concentration of the two or as the holding of both powers by the same person(s) at the same time. Of course, the concentration can be in reality more complex and subtle than what was described and consist of a mix of the two forms. Regardless of the view one may have on the understanding of the concept, it’s less important to focus on the form of the concentration of economic and political powers than on the effect of such concentrations. The very concrete impact can be disastrous for an economy.

In order to realize the magnitude that this impact can have, it is interesting to analyze first why powerful economic groups and individuals may attempt to capture political institutions. In reality, according to the developmental conception of competition, it is very important to empower low income people, to protect them against economic power and to ensure that they fully participate and contribute to the economic life. This presupposes a specific view to the goals of competition, a view where specific categories of people, the low income ones, are benefiting from the redistribution of wealth. (The consumer welfare standard does not deal with the question of which category of people benefit from the redistribution). The inevitable reaction of rational powerful economic groups is to reject such position as it not only endangers the expansion of their power and wealth but also threatens to shrink it. One way to reject such rules is to capture government power if it is not already the case. Such a conflict illustrates where the antagonism lies between developmental competition law and the concentration of economic and political powers.

In practice, it’s very important to differentiate between three scenarios.

First, if no competition law is adopted in a given country where economic and political powers overlap, the effect can be as simple as the blocking of every attempt to introduce any kind of competition law be it a pro-development or a pro-efficiency one (One interesting example is Guatemala where the adoption of a competition law has been dragged on for years and only after the EU pressed for it in its association treaty did Guatemalan authorities started to act. Even so, they are waiting to the very last moment when the deadline expires to enact the law (December 2016)). As a consequence, powerful producers will keep benefiting from missing competition to the sacrifice of consumers. In particular, low income consumers that would eventually have been able to afford new products as a consequence of the drop in prices will not see this scenario occurring. Put differently, powerful dominant firms may keep extracting undeserved profits thereby reinforcing their economic power. The distributive dimension at the heart of competition law will simply be nonexistent.

Second, even in cases where obstructing the adoption of a competition act is no longer possible ( international commitment/pressure from an international body), the economic and political powers may try to lower the impact such regulation may have on their welfare by interfering in the enactment process. Having a vested interest in maintaining the status quo, the hands concentrating economic and political power will do what it takes to preserve their wealth. This can be reflected in the adopted text through specific and sectorial exemptions, setting up a simple consultative authority, narrowing the scope of the Act (…). Competition law may simply look as an empty shell.

From the two above mentioned situations it emerges that economic and political powers can undertake “preventive” action that simply obliterate the effect competition law may have on addressing inequality.

But lets assume, in a third scenario, that a given developing country succeeded in introducing a competition act and setting up a competition authority (CA) but at the same time this authority faces a high concentration of economic and political power. Naturally, the question that emerges relates to whether the issue should be or can be a top priority from the perspective of development competition and, if yes, how to achieve it?

It should be noted first that CAs are not immune to external influences. However, their resistance to these interferences depends to a great extent on the powers they were granted. At the same time, not only the nature of powers and the institutional architecture (Both influenced by the intervention of interest groups in the enactment process) but also the public support a CA enjoys determines significantly the answer to the question raised above.

Even if the creation of a strong CA materializes, its task will not be an easy one. From a general point of view, it is clear that fighting against the concentration of economic and political power should be considered as a top priority in any CA’s mission. The main reason of course is that a balanced development cannot be achieved in the presence of a concentration of economic and political power. Instead, inequality may persist or even be exacerbated. In practice, however, the existence of such concentration of power can greatly obstruct competition authority efforts as long as (as soon as) a proactive approach to the enforcement of competition provisions against powerful economic entities is undertaken (budget cutting, huge press campaigns…).

At the end, it clearly appears that, as some of our readers have commented, one of the most important roles for competition law and policy from the perspective of development is tackling the concentration of economic and political powers but this concentration also can make competition law and policy ineffective in most developing countries.

*Co-editor, Developing World Antitrust

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Does Competition Policy Promote Development?

By Francisco Beneke*

There are almost 80 developing countries that have enacted an antitrust statute.[1] In such economies, budget constraints force governments to prioritize the implementation of policies that have the greatest impact. Assigning resources to, for example, prevent and eradicate terrible widespread diseases may be more justified than improving the conditions of roads. The situation is no different for competition policy. The antitrust agency has to be staffed and equipped, which requires taxpayers’ money. Therefore, it is important to know if antitrust law contributes to the development of a country and if there are any adjustments to be made in order to enhance its positive effects.

The academic debate on whether competition policy promotes development is complicated. First, because development itself is a controverted concept and, thus, there are many approaches on how to measure it. In this post I will focus on GDP growth. Even if a high income per capita is a poor measure of development, it is still a valid (though it should by no means be the only) goal to increase the income levels of the population in general.

The second reason for the complexity of the debate is the distinction between competition and competition policy. Many theoretical and empirical studies make the case for a positive relationship between more competition and technological innovation, productivity, and economic growth. However, a different issue is the effect of the policy itself. In other words, is competition policy effective in procuring greater rivalry among firms and, therefore, spurring increases in productivity and innovation that cause sustained long-term growth?

The answer to this question is not a matter settled between academics. Exploring one aspect of competition policy in the US, the enforcement of the law over the period of 1947-2003, Young and Shugart II (2010) find that the activities of the DOJ (measured by the ratio of its expenditures on the Antitrust Division to GDP) are associated with negative impacts on the productivity of firms in the short run with no evidence of long run benefits that compensate the temporary loss of productivity. In other words, it appears that behavior adjustment to antitrust rules imposes additional production costs on firms.

One weakness of the study is, strangely, the timeframe that is analyzed. Usually a greater temporal scope of the data allows for estimations less sensible to short-term shocks. However, in this particular case, the study is measuring different things across time regarding competition policy. As it is known, antitrust enforcement in the US went through a deep overhaul in the late 70’s and all through the 1980’s. Therefore, it is hard to know from the study the effects that the current design has.

In another study, Dutz and Hayri do find a positive association between the perception of firms that competition policy works and economic growth (Dutz and Hayri (1999)). The measure is taken from the Executive Opinion Survey (EOS) administered by the World Economic Forum. It captures the perception of firms, excluding that of other key stakeholders, such as consumers. Therefore, it could be problematic to interpret it as a measure of the overall quality of competition policy.

Another problem of using this and other perception measures of the effectiveness of competition policy is that this latter concept is in itself ambiguous. The EOS does have methods to ensure consistency of the answers within a country, but a more difficult task is to ensure that the mindset with which executives evaluate competition policy across countries is comparable.

A few examples can illustrate the problem mentioned in the paragraph above. In the 2015 release of the EOS’s results we have that in Latin America the county where firms perceive that competition policy works the best is El Salvador, with a slightly better score than Chile. Although El Salvador has made a lot of progress in the implementation of competition policy, Chile has a significantly better track record in actively pursuing cartels and abuses of dominance. It is also surprising to see that Mexico falls well behind and even ranks worse than Guatemala, a country with no competition law. While no measure is perfect, the one used in Dutz and Hayri (1999) is far from adequate to measure real differences in the effectiveness of competition policy across countries.

Other studies use a composite index based on both perception and objective data on competition policy such as the formal and factual independence of antitrust agencies and the years of existence of a competition statute (Voigt (2006) and Bolaky (2013)). For a review of the literature that analyzes the effects of competition policy and growth see Petrecola, et al. (2015). These studies deserve some comments. In order to keep this post short, their analysis will be the object of a future entry.

The studies that find an association between more competition and strong economic performance present their own challenges. Petrecola, et. al. (2015) is an interesting case in which the authors find a positive association between the perception of the intensity of competition within a country and growth at the global level, but find a statistically significant negative association when considering only Latin American countries.

It is a hard task to reconcile these findings. The authors offer some potential explanations such as the accurateness of the indicators used, the preference of macroeconomic policy over competition policy (which both reduces the relative effects of competition policy on growth and the priority that governments give to the former). What is curious is that the indicator used in this study captures the perception of the intensity of local competition and not the effectiveness of competition policy so the explanations address why competition itself has a negative impact on growth. In addition, the reasons put forward argue for a reduced effect of competition policy but do not explain the “wrong” sign of this variable in the regression results.

Another aspect of competition policy is its advocacy pillar. The relationship between certain reforms usually advocated by antitrust authorities and growth has been vastly explored. Openness to trade was found to have a positive significant association with investment rates in Levine and Renelt (1992) and Brunetti and Weder (1995). Bailey, Graham and Kaplan (1985) find that the deregulation of the airlines industry in the 70’s explains most of its growth in productivity. However, it is worth pointing out that an important issue would be to measure the effectiveness of the advocacy efforts of the authority in ensuring reforms that promote growth.

Competition authorities rely on the studies that show its net positive effects on economic performance to claim a central role in the formulation of public policy and to receive more resources to expand the scope of their enforcement and advocacy activities. And to be fair, there is no shortage of such studies. However, this is only part of the story. Competition policy conceived as an instrument to enhance consumer welfare is not conclusively proven to promote growth and, least of all, development.

Possibly as a result of this, there is an emerging literature that addresses the issue of whether a different competition policy can be designed that fits the needs and priorities of developing countries. Some prominent scholars on the issue include Eleanor M. Fox and Michal S. Gal. Both scholars are co-authors of an influential paper on the subject, where they explore some of the specific economic and social characteristics of developing countries that warrant an adjustment of antitrust law and policy (Gal and Fox (2014)). Some actual examples of adapting competition policies to meet development goals are China and South Africa.

To conclude, I would like to stress that the positive net effects of competition policy on economic growth are not conventional wisdom. It is still an open question and invites academics and practitioners to contribute to the clarification of such an important matter.

* Co-editor, Developing World Antitrust

@Paco_Beneke

[1] The International Competition Network has member authorities from 115 different economies. This number is not exhaustive of all countries that have a competition law because, for example, the Chinese antitrust agencies are not members of the network. However it is still a good approximation. The number of the advanced economies from the International Monetary Fund is 40. This latter number includes two economies without an antitrust statute: San Marino (a country of approximately 31,000 inhabitants) and Macao (a special administrative region in China). This leaves us with some 77-plus developing countries that have an antitrust statute.

References

Bailey, Elizabeth E.; Graham, David R.; and Kaplan, Daniel P. Deregulating the Airlines. Cambridge, Massachusetts. MIT Press (1985).

Bolaky, Baineswaree. “The Effectiveness of Competition Law in Promoting Economic Development.” International Journal of Economics and Finance Studies, Vol. 5, No. 1, (2013).

Brunetti, Aymo, and Weder Beatrice. “Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures.” Weltwirtschaftliches Archiv 134.3 (1998): 513-33.

Dutz, Mark and Hayri, Aydin. “Does More Intense Competition Lead to Higher Growth?” CEPR Discussion Paper 2249, C.E.P.R. Discussion Papers (1999).

Gal, Michal S. and Fox, Eleanor M., “Drafting competition law for developing jurisdictions: learning from experience”. New York University Law and Economics Working Papers. Paper 374 (2014).

Levine, Ross and David Renelt. “A Sensitivity Analysis of Cross-Country Growth Regressions.” American Economic Review Vol. 82, No. 4, pp. 942-63 (1992).

Petrecolla, Diego; Greco, Esteban; Romero, Carlos; and Vila-Martinez, Juan P. “Economic Structure and Competition Policy Application in Latin American Countries.” In The Economic Characteristics of Developing Jusrisdictions: Their Implications for Competition Law. Gal, Michal S. et al, Eds. Edward Elgar Publishing, Northampton, Massachusetts (2015).

Voigt, Stefan “The Economic Effects of Competition Policy: Cross-Country Evidence Using Four New Indicators.” Available at SSRN: http://ssrn.com/abstract=925794 (2006).

Young, Andrew and Shughart, William. “The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective,” Public Choice, Springer, vol. 142(3), pp. 409-422, March (2010).

 

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